As Australia’s property market continues to grow and affordability remains a key concern the subject of negative gearing is never far from the spotlight.
Over the weekend Labor Leader Bill Shorten proposed restricting the practice to only include newly-constructed homes. His proposal would not affect investment properties bought before July 2017.
The Turnbull government has ruled out scrapping the policy for now, but says it is currently reviewing a number of changes to taxation including negative gearing. Last year, the Greens also flagged significant changes under their party platform.
Many are calling for the controversial tax break to be abolished in an effort to help more first home buyers enter the market. So is negative gearing fueling an affordability crisis in Australia’s property market? We chatted to the experts about the policy and what it means for the property sector.
Negative gearing is a tax rule that allows investors to claim losses experienced by their assets as a tax deduction.
As it relates to rental properties the Australian Tax Office states: “A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings.
Financial adviser Bruce Brammall says while the tax rule is available to other investments it is primarily used for property. “It does allow you to go into what would otherwise be a negative cash flow investment,” he says.
“Negative gearing does mean you are losing money. The only way it makes sense is if the asset you hold is increasing at a rate that’s preferably multiple times the rate you are gearing.”
CoreLogic RP Data Head of Research Tim Lawless says the most recent ATO taxation data provides an interesting overview of who is claiming negative gearing benefits.
“In terms of the number of individuals claiming net rent, 68.9% of claimants had a taxable income of less than $80,000,” Lawless says.
“While more taxpayers with a taxable income of less than $80,000 claim net rent losses, it accounts for only 13.1% of all individuals with a taxable income below $80,000. On the other hand, more than a quarter (25.8%) of all taxpayers with an income of more than $80,000 claimed net rent.”
“In terms of the value of these losses, individuals earning less than $80,000 claimed rental losses of $2.781 billion or an average of $2,050 per claimant.”
He says while many Australians take advantage of the tax rule “it is those with higher incomes which garner the greatest benefit from a negative gearing strategy”.
Brammall says there are a lot of issues at play when it comes to affordability, and to single out negative gearing is shortsighted.
He says low interest rates, a reasonably strong economy and the cyclical nature of the property market – which has been on the up for the past three years – all conspire to increase property prices.
Lawless says negative gearing has always been a contentious issue.
“For those that already own investment properties it means that they can offset their losses against their taxable income, for those that don’t own a home many feel that the availability of negative gearing is advantageous for those who already own a home compared to those who don’t.
However Adrian Pisarski, Chair of housing advocacy group National Shelter, says Australia’s current tax arrangements undermine housing affordability.
“We are witnessing what happens when the expectation of capital gain backed by tax exemptions and bolstered by generous deductions drives speculative investment in our housing markets,” he says in recent comments on the issue.
“High prices damage productivity, drive key workers to the fringe of our cities and lock low income households out of wealth generation, consigning them to deteriorating rental markets and lengthy commutes.”